Wage shares and demand regimes in Central America: An empirical analysis for Costa Rica, El Salvador, Honduras, Nicaragua, and Panama, 1970-2016

This paper analyzes the relationship between functional income distribution aggregate demand and economic growth in five Central American countries; Costa Rica, El Salvador, Honduras, Nicaragua, and Panama for the period 1970-2016. It estimates the effects of a change in the wage share on aggregate demand based on a post-Kaleckian model, which allows for either profit- or wage-led demand. The results show that the domestic demand is wage-led in the five countries. The same applies for total demand with the exception of Panama, whose domestically wage-led demand turns profit-led when including the effect of distribution on net exports. Finally, it is argued that there is room for a wage-led recovery in Central America.